Domestic Economy

Privatization Needs Prioritization

Privatization Needs PrioritizationPrivatization Needs Prioritization

As the country gears up for a gradual change in the economic landscape after lifting of the economic sanctions imposed by the West over Iran’s nuclear program, economic experts are asking what should be the government’s priorities in the process of privatization? In other words, privatizing which enterprises or sectors would generate maximum benefits to the economy?

The significance of this question lies in the fact that moving away from a government-dominated economy and successful implementation of the privatization process requires skills and experiences that both the government and private sector lack at the moment, PhD Finance student in Boston University, Ali Ebrahimi-Nejad wrote in Financial Tribune’s sister newspaper, Persian daily Donya-e Eghtesad.

“Prioritizing industries and initiating the process of privatization in competitive sectors such as the food industry would help both the government and the private sector attain the level of maturity required for moving towards the more complex process of privatizing government-exclusive sectors such as electricity and telecommunication.”

The following industries were listed by the expert where a structural change and moving from government towards private ownership could help improve efficiency and profitability:

1. Innovative industries: Companies working in such sectors as computer and information technology are highly competitive and require quick adaptation to modern trends and advancements in the sector. The bureaucratic and complex structure of government organizations is in contrast with the basic rules of efficiency in such sectors.

2. Industries where cutback on quality with the aim of lowering production costs is easily recognized by the consumers: Since the private enterprises have a natural tendency to increase profitability by reducing costs, if such measures adopted by the company are not easily identified by the consumers, it threatens to disturb the natural market mechanism. For example, if a restaurant uses lower quality ingredients in a bid to increase profits, the customers are likely to be disappointed and shift to other restaurants, resulting in loss to the restaurant’s owner. Whereas in such areas as the national security, reducing costs by cutting back on research and development is unlikely to come under public scrutiny, resulting in lower quality of services. Hence, privatization might not necessarily be the right option in such sectors.

3. Competitive industries where the customer’s choice is a decisive factor: Privatization of such industries could motivate the enterprises to improve the quality of their services in a bid to survive in the highly competitive market, leading to overall improvement in the sector.

4. Industries where brand reputation is the key success factor: The private sector is often more motivated to offer quality products and services over an extended period of time in a bid to build and maintain a loyal customer base. Therefore dominance of the private sector in such sectors as home appliances, etc. is more likely to improve performance.

  Privatization in Iran

Privatization in Iran has been part of a long-term plan to move towards a more market-oriented economy. It is widely believed that if current governmental organizations are privatized they will become more efficient and profitable in the long run.

The Constitution of the Islamic Republic of Iran calls for active participation in economic activities by all citizens. Article 44 of the Constitution divides the economic system into three main sectors, namely public, cooperative and private sectors.

A major step forward towards privatization was in 2004 when the Expediency Council offered a new interpretation of the Article 44 and the Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei approved and decreed the new interpretation. The article obliged the government to bestow all but those activities included in it, to the public non-state, private and cooperative sectors.

In terms of the government’s ownership of organizations and its obligations towards privatization, the law has provisioned three groups of state owned enterprises; the government has been prevented from ownership, investment and managerial rights in group one organizations, the government is obliged to transfer 80% of the total value of the group two organizations to private, cooperative and public nongovernmental organizations, while ownership, investment and managerial affairs of group three organizations is exclusive to the government.

  Misguided Prioritization

Despite these statements, effective official backing for privatization remains anemic. Member of parliament, Hamid-Reza Fouladgar, cites misguided prioritization by the government as a reason for improper implementation of the Article 44.

“Over the past years, more priority was assigned by the government to offering the companies and organizations listed in the law under group two rather than group one, since offering these enterprises ensured a more immediate source of revenue for the government. But as the private sector was unable to afford the large enterprises, they never were fully privatized and remained under the government’s wing,” he said.

Proper implementation of privatization finds special significance as foreign companies are expected to enter the domestic market and engage in partnerships with Iranian companies following the removal of the economic sanctions; which entails improvement in the overall business environment and creating an atmosphere for healthy competition and innovation.